Banks Financials@

S.Krishnamoorthy: krisna_om@rediffmail.com, Cell:9821461488

@Source Data Acknowledgement: RBI & Various Internet Sources
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RBI Act 1934 governs the Reserve Bank functions

Banking Regulation Act, 1949 governs the financial sector

Public Debt Act, 1944/ Government Securities Act governs government debt market

Securities Contract (Regulation) Act, 1956 regulates government securities market

Indian Coinage Act, 1906 governs currency and coins

Foreign Exchange Management Act,1999 [previously Foreign Exchange Regulation Act,
1973] governs trade and foreign exchange market

Companies Act, 1956 governs banks as companies

Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980 relates
to nationalization of banks

Bankers' Books Evidence Act

Banking Secrecy Act

Negotiable Instruments Act, 1881

Acts and Regulations Governing Banks and Financial Sector
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State Bank of India Act, 1954

The Industrial Development Bank (Transfer of Undertaking and Repeal) Act,
2003

The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993

National Bank for Agriculture and Rural Development [NABARD] Act

National Housing Bank Act

Deposit Insurance and Credit Guarantee Corporation Act

SARFAESI Act,2002- Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act

Prevention of Money Laundering Act,2002

Government Securities Act,2006 and The Government Securities Regulation Act 3
2007

Payment and Settlement Systems Act, 2007

Acts and Regulations Governing Banks and Financial Sector
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Liquidity Adjustment Facility [ LAF ] with Repo and Reverse Repo

Changes in Repo and Reverse Repo rates

Changes in SLR and CRR rates

Special liquidity facility

Marginal Standing Facility at 1% over Repo rate

Issuance of T-bills for managing liquidity and for funding government

Open Market Operations [ OMO] issuance of G-Secs

Borrowing and floating stock of bonds

Issuance of bonds on Tap to manage borrowing, liquidity





Tools with RBI to manage Financial Markets
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Tools with RBI to manage Financial Markets

Issue of G-sec thru yield based / price based auctions to manage interest
rate scenario

When issued bonds

Changes in Bank Rate & quantum of funding for refinance facility

Changes in interest rates on NRI and Fx currency deposits

Changes in rules on ECB and FCCB

Monetary Stabilization System [ MSS ] Bonds for sterilizing forex flows and
managing liquidity

Buy-sell or Sell-buy Forex swaps

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Prudential norms refers to ideal/ responsible norms to be maintained by banks

In line wit the international practices and as per the recommendations made by
the Committee on the Financial System (Chairman M. Narasimham), the RBI
has introduced, in a phased manner, prudential norms so as to move
towards greater consistency and transparency in the published accounts

The prudential norms, inter-alia, relates to
Capital adequacy
Asset classification
Provisioning for assets
Income recognition
Classification, valuation and operation of investment portfolios
Provision for investment fluctuation reserve
Capital market exposures
Restructuring of advances by banks

Prudential Norms for Banks
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Prudential Norms for Banks
The basic premise of these norms, inter-alia, are
The policy of income recognition should be objective and based on record of recovery
rather than on any subjective considerations

The classification of assets of banks has to be done on the basis of objective criteria which
which would ensure a uniform and consistent application of the norms

The provisioning should be made on the basis of the classification of assets based on the
period for which the asset has remained nonperforming and the availability of security and
the realizable value thereof

Banks are to ensure that while granting loans and advances, realistic repayment
schedules may be fixed on the basis of cash flows with borrowers to facilitate prompt
repayment by the borrowers and thus improve the record of recovery in advances

With the introduction of prudential norms, the Health Code-based system for classification
of advances has ceased to be a subject of supervisory interest

As such, all related reporting requirements, etc. under the Health Code system also cease
to be a supervisory requirement

Banks may, however, continue the system at their discretion as a management information
tool

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It is the ratio which determines the capacity of the bank in terms of meeting the
time liabilities and other risk such as credit risk, operational risk, etc.

In the most simple formulation, a bank's capital is the "cushion" for potential
losses, which protect the bank's depositors or other lenders

Banking Regulators in most countries define and monitor CAR to protect
depositors, thereby maintaining confidence in the banking system

CAR is similar to leverage and in the most basic formulation, it is comparable
to the inverse of debt to equity leverage formula

CAR uses equity over assets instead of debt to equity

Unlike traditional leverage , CAR recognizes that assets can have different levels
of risk
Capital adequacy ratio [CAR]
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CAR also called CR (Weighted) AR
It is the ratio of a banks capital to its risk
National regulators track a banks CAR/CRAR to ensure that it can absorb
a reasonable amount of loss

Risk Weighting:

Since different types of assets have different risk profiles, CAR primarily
adjusts for assets that are less risky by allowing banks to "discount" lower-
risk assets

The specifics of CAR calculation vary from country to country, but general
approaches tend to be similar for countries that apply the Basel Accords

In the most basic application, Govt. debt is allowed a 0% "risk weighting"
that is, they are subtracted from total assets for purposes of calculating
the CAR

Capital to Risk Assets Ratio [CRAR]
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Risk weighting:
Local Regulations establish that cash and Govt bonds have a 0% risk
weighting
Residential mortgage loans have a 50% risk weighting
All other types of assets (loans to customers) have a 100% risk
weighting

Bank "A" has Assets totaling 100 units, consisting of:
Cash: 10 units
Govt. Bonds: 15 units
Mortgage Loans: 20 units
Other Loans: 50 units
Other Assets: 5 units

Bank "A" has deposits [Liability] of 95 units, all of which are deposits

By definition, Equity is equal to Assets minus Debt = 5 units

Risk Weighting of Assets
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Bank A's risk-weighted assets are calculated as follows:
Cash10 * 0% = 0
Government bonds15 * 0% = 0
Mortgage loans20 * 50% =10
Other loans50 * 100% = 50
Other assets5 * 100% = 5
Total risk Weighted assets= 65
Equity [100 95 ] = 5
CAR (Equity/RWA) = 7.69%

Even though Bank "A" would appear to have a Debt : Equity ratio of 95:5, or
Equity to assets of only 5%, its CAR is substantially higher

It is considered less risky because some of its assets are less risky than
others
Computation of Risk Weighting
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The Basel rules recognize that different types of equity are more important than
others

To recognize this, different adjustments are made:
Tier I Capital: Actual contributed equity plus retained earnings.
Tier 2 Capital: Preferred shares plus 50% of sub- ordinated debt
Tier 3 Capital: Short term sub- ordinated debt

Different minimum CAR ratios are applied:
Minimum Tier 1equity to risk-weighted assets may be 4%,
While minimum CAR including Tier 2 capital may be 8%.[RBI has
prescribed 9%]

There is usually a maximum of Tier 2 capital that may be "counted towards
CAR, depending on the jurisdiction

Basel Norms on Capital
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Tier 1 capital is the core measure of a bank's financial strength from a
regulator's point of view
It is the most reliable form of capital
It consists of the types of financial capital considered the most reliable,
liquid and primarily equity


Tier 2 capital is a measure of a bank's financial strength with regard to the
second most reliable forms of financial capital, from a regulator's point of view
T2 capital shall not exceed 100% of T1 capital

Tier 3 Capital is essentially short term sub-ordinate debt for the sole purpose of
meeting a proportion of the capital requirement for market risks [ it is not yet
allowed by RBI]


Basel Norms on Capital
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Tier 1 Tier 2
Permanent shareholders equity Undisclosed reserves
Perpetual non convertible prefrence shares Revaulation reserves [only 45%]
Disclosed reserves General provisions/general loan loss reserves
Innovative capital instruments [not to
exceed 15% of T1]
Hybrid debt capital instruments [with
characteristics of equity and debt]
Subordinated term debt [ only 50% of T1]
Redeemable cumulative preference shares
T2 capital not to exceed 100% of T1 capital
Basel's /RBI's Prescribed Instruments for Banks Capital
Basel Norms on Capital
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The Basel Committee in Basel Switzerland [BCBS] was established by The Bank
for International Settlements [BIS]

Objectives of The Basel Committee on Banking Supervision are
Provide a forum for regular cooperation on banking supervisory matters
Enhance understanding of key supervisory issues
Improve the quality of banking supervision worldwide
Exchange information on national supervisory issues, approaches and
techniques
Promote common understanding amongst financial sector regulators
Use the common understanding to develop guidelines and supervisory
standards in desirable areas

Basel Committee is best known for its
International Standards on Capital Adequacy
The Core Principles for Effective Banking Supervision
The Concordat on Cross-border Banking Supervision



Basel Norms for Banks
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Basel I Norms
Set out the minimum capital requirements of financial institutions

Focused mainly on credit risk by creating a bank asset classification system

Required Banks that operate internationally to maintain a minimum 8% capital
based on a % of risk-weighted assets

Classified banks assets into five risk categories:
Cash, central bank and government debt*: 0%
Public sector debt: 0%, 10%, 20% or 50%
Development bank debt*: 20%
Residential mortgages: 50%
Private sector debt*: 100%
*Includes specified OECD and non-OECD debts etc


Basel I Norms [1998]
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Basel II Norms main purposes
To help the banking regulators to guide how much risk adjusted capital
local banks should maintain for
To ensure that banks hold capital reserves appropriate to the risk the bank
is exposed through its lending and investment practices.
To safeguard the solvency of the banks
To promote sufficient consistency & competitive equality amongst
internationally active banks
To protect the international financial system from the problems of major
bank/s collapse and for overall economic stability
introduced a new 150% weighting for borrowers with lower credit ratings
The minimum risk weighted capital required was 8% with Tier 1 capital at
4% of this amount.


Basel II uses a "three pillars" concept
Minimum capital requirements [addressing risk]
Supervisory review
Market Discipline


Basel II Norms [2004]
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First Pillar
Deals with maintenance of regulatory capital calculated for three major
components of risk that a bank faces
Credit risk
Operational risk
Market risk
[Other risks were not considered fully quantifiable]

The three risks component can be calculated as follows
Credit risk
Standardized approach
Foundation Internal Rating Based [IRB] approach
Advanced IRB
[For the above Banks relied on the on the ratings generated by external
credit rating agencies]
Operation risk
Basic Indicator approach
Standardized approach
Internal Measurement approach
Market Risk
Value at Risk [VaR] approach
Three Pillars of Basel II
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Second Pillar
Deals with the regulatory response to the first pillar
Gives regulators much improved tools
Provides a framework for dealing with other risks such as
Concentration risk
Liquidity risk
Legal risk
Pension risk
Reputational risk
Strategic risk
Systemic risk
Gives banks power to review their risk management system

Third Pillar
Promotes Market Discipline for good corporate governance
Aims to complement the Pillars 1 & 2 review process by developing a set of
disclosure requirements
Allows the market participants to gauge the capital adequacy of an financial
institution
Three Pillars of Basel II
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RBI has implemented the Basel II standardized norms for banks in 2009

RBI norms under Basel II are
Common equity (incl of buffer): 3.6%(Basel 2 buffer requirement are zero)
Tier 1 Capital: 6%.
Total Capital : 9 % of risk weighted assets.

Under Basel III the specified norms are
Common equity including conservation & seasonal buffer: 7% to 8.5%
[4.5% +2.5%(conservation buffer) + 0-2.5%(seasonal buffer)]
Tier 1 capital: 8.5% to 11%
Total capita: l0.5% to 13.5%nary assessment of their risk management
system

For assessing operational risks in banks RBI specified systems are
Internal credit ratings
Basic Indicator Approach/ Alternative Standardized Approach
Advanced Management Approach[AMA]


Implementation of Basel Norms in India
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Basel III Norms [2010]



Basel III Norms provides
Two new capital buffers: a conservation buffer and a countercyclical buffer
New and substantial capital charges for non-cleared derivative and other
financial market transactions
Significant revisions to the rules on the types of instrument that count as bank
capital
An unweighted leverage ratio

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Capital Ratios
Replaces core Tier 1 capital with a tougher concept of Common Equity

Common equity consists of only common shares plus retained income

Require banks to hold 4.5% of common equity [Basel II required only 2%
of Core T1 capital]

The total Tier 1 increased from 4% to 6%

The other types of Tier 1 instrument - additional going concern capital can
account for up to 1.5% of T1 capital

The total minimum capital remains at 8%, subject to a new capital buffer

T1 capital must be 6%

T2 will no longer be divided into upper and lower tiers & can account for
only 2% of capital

T3 meant solely for market risk purposes will be removed completely


Basel III Norms
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New capital buffers
Capital Conservation Buffer
All banks to hold sufficient capital & have a capital conservation buffer
above the minimum 8% total capital

This buffer is set at 2.5% and consisting solely of common equity after
deductions

Effectively common equity capital must be equal to 7% of risk-weighted
assets other than in times of stress when the buffer can be drawn down

The buffer is to ensure that banks maintain capital levels throughout a
significant downturn and have less discretion to deplete their capital by
dividend payments

Banks that do not meet this buffer will be restricted from paying dividends,
buying back shares and paying discretionary employee bonuses
Basel III Norms


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Countercyclical Buffer
Banks may at certain times be required to hold a countercyclical buffer of
up to 2.5% of capital in the form of common equity or other fully loss-
absorbing capital

This is a macro-prudential tool to protect banks from periods of excessive
credit growth and is at the national regulators' discretion

Leverage Ratio
Basel committee agreed to test an unweighted ratio of 3% over a transition period
Basel III Norms
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Non performing Assets [NPA]
An asset including lease asset becomes non performing when it ceases to
generate income for the bank
A NPA is a loan/advance where interest and /or installment of principal remain
overdue for more than 90 days in respect of the loan/advance

Income Recognition
The policy of income recognition has to objective and based on the record of
recovery
Internationally income from NPAs is not recognized on accrual basis but is
booked as income only when it is actually received . Therefore banks should not
charge and take to income account interest on any NPA


Other Prudential Norms
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Asset Classification
Banks are required to NPAs into following three categories based on the period
for which the asset remained NP and realisability of dues
Substandard assets [which has remained NPA for <= to 12 months ]
Doubtful assets[which has remained NPA for > 12 months]
Loss assets [asset considered as uncollectible, has little value other
than salvage value]

Provisioning Norms
The primary responsibility for making adequate provisions for diminution in the
value of loans , investment and other assets is that of the banks management
and statutory auditors
Loss assets: to be 100% written off
Doubtful assets
Upto 1 yr : 20% provision
1 to 3 yrs: 30% provision
3 yrs: 100% provision
Sub-Standarad assets: a general provision of 10% of total outstanding to
be made without making allowance for ECGC guarantees and other
securities available

Other Prudential Norms
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Padmanabhan committee on on-site supervision of banks recommended five points [A to
E] rating scale.RBI introduced international rating model CAMELS

CAMELS model is based on
Capital adequacy
Asset quality
Management
Earning
Liquidity
Systems and controls

RBI annual on-site inspection of banks assess their financial health and evaluate their
performance based on above parameters

Based on findings of the inspection banks are assigned supervisory ratings based on the
CAMELS rating

OSMOS [Offsite Surveillance and Monitoring System] requires the banks to submit
detailed and structured information periodically on which basis RBI analyzes the health of
the banks


RBIs CAMELS & OSMOS
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ICICI Bank: Balance Sheet as at 31st March 2011 2010
Capital and Liabilities:
Total Share Capital 1,152 1,115
Equity Share Capital 1,152 1,115
Share Application Money 0 0
Preference Share Capital 0 0
Reserves 53,939 50,503
Revaluation Reserves 0 0
Net Worth 55,091 51,618
Deposits 225,602 202,017
Borrowings 109,554 94,264
Total Debt 335,156 296,280
Other Liabilities & Provisions 15,986 15,501
Total Liabilities 406,234 363,400
Amt in Rs Cr
Banks Balance Sheet: Capital & Liabilities
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ICICI Bank: Balance Sheet as at 31st March 2011 2010
Assets
Cash & Balances with RBI 20,907 27,514
Balance with Banks, Money at Call 13,183 11,359
Advances 216,366 181,206
Investments 134,686 120,893
Gross Block 9,107 7,114
Accumulated Depreciation 4,363 3,901
Net Block 4,744 3,213
Capital Work In Progress 0 0
Other Assets 16,347 19,215
Total Assets 406,234 363,400
Amt in Rs Cr
Banks Balance Sheet: Assets
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ICICI Bank: Profit & Loss Account for the
year ended as at 31st March 2011 2010
Income
Interest Earned 25,974 25,707
Other Income 7,109 7,292
Total Income 33,083 32,999
Expenditure
Interest expended 16,957 17,593
Employee Cost 2,817 1,926
Selling and Admin Expenses 3,785 6,056
Depreciation 562 620
Miscellaneous Expenses 3,810 2,780
Preoperative Exp Capitalised 0 0
Operating Expenses 8,594 10,222
Provisions & Contingencies 2,380 1,160
Total Expenses 27,932 28,974
Net Profit for the Year 5,151 4,025
Extraordionary Items -2 0
Profit brought forward 3,464 2,810
Total 8,614 6,835
Amt in Rs Cr
Banks Profit & Loss Account: Income
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ICICI Bank: Profit & Loss Account for the
year ended as at 31st March 2011 2010
Dividend & Dividend Tax
Preference Dividend 0 0
Equity Dividend 1,613 1,338
Corporate Dividend Tax 202 164
Per share data (annualised)
Earning Per Share (Rs) 45 36
Equity Dividend (%) 140 120
Book Value (Rs) 478 463
Appropriations
Transfer to Statutory Reserves 1,780 1,867
Transfer to Other Reserves 0 1
Proposed Dividend/Transfer to Govt 1,815 1,502
Balance c/f to Balance Sheet 5,018 3,464
Total 8,614 6,835
Amt in Rs Cr
Amt in Rs Cr
Banks Profit & Loss Account: Dividend & Appropriations
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ICICI Bank: Cash Flow Statement for the
year ended as at 31st March 2011 2010
Net Profit Before Tax 6,761 5,345
Net Cash From Operating Activities -6,909 1,869
Net Cash (used in)/from Investing
Activities -2,109 6,151
Net Cash (used in)/from Financing
Activities 4,283 1,383
Net (decrease)/increase In Cash and
Cash Equivalents -4,784 8,907
Opening Cash & Cash Equivalents 38,874 29,967
Closing Cash & Cash Equivalents 34,090 38,874
Amt in Rs Cr
Banks Cash Flow Statement
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ICICI Bank: Financial Ratios for the
financial years 2011 2010
Investment Valuation Ratios
Face Value 10 10
Dividend Per Share 14 12
Operating Profit Per Share (Rs) 64 50
Net Operating Profit Per Share (Rs) 281 294
Free Reserves Per Share (Rs) 358 357
Bonus in Equity Capital -- --
Interest Spread [Times] 4 6
Adjusted Cash Margin(%) 18 14
Net Profit Margin (%) 16 12
Return on Long Term Fund(%) 43 45
Return on Net Worth(%) 9 8
Adjusted Return on Net Worth(%) 9 8
Return on Assets Excluding
Revaluations 478 463
Return on Assets Including
Revaluations 478 463
Profitability Ratios
Banks Financial Ratios
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ICICI Bank: Financial Ratios for the financial years 2011 2010
Management Efficiency Ratios
Interest Income / Total Funds 8 9
Net Interest Income / Total Funds 4 4
Non Interest Income / Total Funds -- 0
Interest Expended / Total Funds 4 5
Operating Expense / Total Funds 2 3
Profit Before Provisions / Total Funds 2 1
Net Profit / Total Funds 1 1
Loans Turnover 0 0
Total Income / Capital Employed(%) 8 9
Interest Expended / Capital Employed(%) 4 5
Total Assets Turnover Ratios 0 0
Asset Turnover Ratio 4 5
Profit And Loss Account Ratios
Interest Expended / Interest Earned 65.29 68.44
Other Income / Total Income 0.02 0.92
Operating Expense / Total Income 24.81 29.05
Selling Distribution Cost Composition 0.94 0.72
Banks Financial Ratios
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ICICI Bank: Financial Ratios for the
financial years 2011 2010
Balance Sheet Ratios
Capital Adequacy Ratio 19.54 19.41
Advances / Loans Funds(%) 64.96 58.57
Credit Deposit Ratio 87.81 90.04
Investment Deposit Ratio 59.77 53.28
Cash Deposit Ratio 11.32 10.72
Total Debt to Owners Fund 4.1 3.91
Financial Charges Coverage Ratio 0.44 0.33
Financial Charges Coverage Ratio Post
Tax 1.34 1.26
Leverage Ratios
Current Ratio 0.11 0.14
Quick Ratio 15.86 14.7
Dividend Payout Ratio Net Profit 35.23 37.31
Dividend Payout Ratio Cash Profit 31.76 32.33
Earning Retention Ratio 64.49 61.4
Cash Earning Retention Ratio 68.01 66.7
AdjustedCash Flow Times 39.77 44.79
Cash Flow Indicator Ratios
Debt Coverage Ratios
Banks Financial Ratios
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Banks Financial Performance Summary
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Banks Financial Performance Summary
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Banks Capital Adequacy
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Banks Priority Sector Advances
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Banks Credit Rating
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Banks Balance Sheet Schedules
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Banks P&L Schedules
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Banks Balance Sheet Schedule
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Banks Balance Sheet Schedules
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Banks Balance Sheet Schedules
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Banks Balance Sheet Schedule
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Banks Balance Sheet Schedules

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Banks Balance Sheet Schedules
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Banks Balance Sheet Schedule
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Banks Balance Sheet Schedule
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Banks P&L Schedules
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Banks P&L Schedules
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Banks Capital Computation
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Banks Business Ratios
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Banks Asset Liability Maturity Analysis
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Banks Lending Exposure
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